Sunday, September 25, 2011

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The question sounds simple, but the answer is not. It all depends on what you mean by “money.”

For example, suppose I were to ask you, “How much money do you have right now?” You open your wallet and you check your piggy bank and, after taking a few minutes to count all the banknotes and coins, you come up with $153.

“$153?” I ask you. “Are you sure that’s all you have?”

“Well,” you reply, “I do have some bank accounts, and a CD (certificate of deposit). I also have a money market account. And then there’s my retirement fund and the value of my house. Shouldn’t that count?”

Harley Hahn

Such questions reveal the slipperiness of the concept of money, and yet they are important to fiscal planners who need to make large-scale decisions of strategic importance. For example, the economists who work for the U.S. Federal Reserve (our independent central bank) need to know, on a weekly basis, how much money there is in the country.

To make such estimates, economists divide money into two principle categories, called M1 and M2. Skipping over the technical details (which vary depending on the country), here are the definitions.

In the United States, M1 consists of the total of all the money stored in:

Conceptually, M1 is a measure of all the money that can be spent immediately, cash and cash equivalents. M2 is a broader concept. It includes all of M1 as well as money held in short-term investments.

The reason M1 and M2 are of interest is that the amount of available money has important effects on the economy. If there is too little money, the economy stagnates. In such cases, increasing the money supply will usually stimulate the economy. However, too much money will cause trouble in the form of inflation, economic bubbles, or both.

Thus, it is important for the economists who make large-scale decisions to understand not only how the economy is doing, but how much money is available. For this reason, the U.S. Federal Reserve measures the total amount of money in the United States, in the form of weekly estimates of M1 and M2.

This brings us back to the original question: How much money is there in the United States? The best answer I know is to look at the values of M1 and M2.

The Federal Reserve regularly publishes the latest values for these measures, which tend to go up over time. As an example, here are the numbers from the beginning of September 2011:

M1 = $2.1363 trillionM2 = $9.5914 trillion

(If you want to look at the current statistics, simply do an Internet search for “federal reserve money stock measures.”)

So we can say there is almost $9.6 trillion in the United States. (Remember, M2 contains M1.) This suggests two other questions. First, how much actual cash is there?

For that number, we can again turn to the Federal Reserve, which conveniently breaks done M1 into its various components. In this case we find:

Cash = $979.6 billion

Dividing this number by the value of M2, we see that actual cash comprises a bit more than 10.2 percent of the total money. This means that almost 89.8 percent of the money in the United States is not in the form of cash. (Remember this the next time you hear someone talk about how the government “prints more money” whenever they want.)

The second question that might occur to you relates to definitions: Isn’t there more money than what is counted within M2? For example, what about large liquid assets – such as long-term deposits over $100,000 – commonly used by governments and large companies?

In fact, there used to be a larger, more inclusive measure called M3, but it has not been used (in the U.S.) since 1996. Here is why.

The Federal Reserve manipulates the economy towards two main goals: high employment and low inflation. Measuring and manipulating the cash and short-term deposits (M1 and M2) has a lot more effect on the economy than does trying to manipulate large, long-term deposits (M3). And the same is true for real estate values, retirement funds, and so on. Moreover, gathering and analyzing the data needed to calculate extra components of the money supply is both expensive and time-consuming and, as Mason said to Dixon, you’ve got to draw the line somewhere.

All of which brings us back to you. Suppose you are at a family barbeque and your brother-in-law asks you if you could loan him $20 until next Thursday. You tell him, “Sorry, but I’m short of cash right now.”

“But I just saw you count your money,” he says. “You have $153 in your wallet. That’s a nice chunk of change.”

“True,” you reply, as you do a quick calculation in your head (dividing $153 by $9.5914 trillion), “but you must put that in perspective. $153 is actually less than 0.0000000016 percent of all the money in the country.”

Good article. If the recession affected all people proportionatly, it would be an equitable shared sacrifice. The growing disparity between rich and poor, disprove that notion.The Supreme Court ruling allowing unlimited corporate money to support political candidates is a perversion of our democracy. ...and that government of the corporations, by the corporations and for the corporations, shall not perish from the earth. - Abraham Lincoln 1863 (NOT)Justice John Paul Stevens wrote that the ruling “threatens to undermine the integrity of elected institutions across the nation. The path it has taken to reach its outcome will, I fear, do damage to this institution.” How does extending free enterprise into having our lawmakers perform as per the highest bidder further our democratic government?Cleanse the temple...Cast out the money changers...